Territorial Tax Research Articles

International Taxation and Production Outsourcing

This paper studies the effects of international taxation on multinational firms’ production outsourcing strategies, which has attracted recent attention from both practitioners and legislators. We formulate a stylized economic model with information asymmetry and find that under the territorial tax system, the presence of global tax disparity may result in subtle changes of a firm's production outsourcing strategy. In particular, the tax consideration can make a multinational firm more inclined to procure materials by its overseas subsidiary and then resell the materials to the contract manufacturer to retain profit in the low tax jurisdiction. Such an effect can not only cause the firm to choose a more expensive material supplier but also overproduce the products. Therefore, besides the general concern of income shifting, tax considerations can further lead to operational distortions. We show that to reduce tax disparity while preventing tax exemption for shifted foreign profit may lead to a win‐win outcome for the firm and the home country stakeholders. The firm will make more efficient operational decisions to obtain a higher after‐tax profit at a certain reduced tax rate, while the home country stakeholders can receive more tax income. Interestingly, the foreign contract manufacturer may also benefit from such a change.

The construct of subjective occupational well-being: Russian sample testing

Subjective occupational well-being, as shown by the authors of this article, is one of the key conditions for occupational health and career longevity in our time. Along with this, existing models associate the achievement of occupational well-being with the realisation of aspirations for personal self-development and autonomy subject to professional competence and favourable emotional and psychosomatic states prevailing in a comfortable working environment. However, these models do not take into account the social and occupational relevance of actors as a factor in their occupational well-being, although any professional occupation is initially aimed at obtaining the results required by society. Any activity, the results of which do not meet the expectations and requirements of society, become unclaimed, the demand for its participants is lost, and the problem of their subjective occupational wellbeing becomes irrelevant. Therefore, it would be incorrect to consider the assessment of personal occupational well-being without correlating it with the assessment of personal social and occupational relevance. As shown in the article, human well-being should also be considered in ethnocultural terms. In this regard, the aim of the present study was to provide a theoretical and empirical justification for the construct of subjective occupational well-being, including the component of social-occupational relevance, using a Russian sample. To verify this point, we conducted an empirical study that involved 285 employees of Russian territorial tax authorities. Their employment records in the tax service ranged from 1 to 34 years, with less than three years in 18% of the sample. Their age range was 22-62 years, with 25% of the sample on the right side of thirty. The sample included 70% of women and 30% of men. The study used The Professional Demand Questionnaire (Kharitonova, 2014), The Occupational Well-Being Inventory (Rut, 2016), The Prevalent Positive Emotional State Questionnaire (Kulikov, 2003), and the single-scale questionnaires - The Utrecht Work Engagement Scale (UWES-17) and Dutch Boredom Scale (DUBS) in Russian adaptation (Schaufeli, Diystra, Ivanova, 2015). The research methods included factor analysis (principal component analysis, varimax rotation) and one-way analysis of variance (ANOVA). The results of the factor analysis showed that the newly proposed construct of subjective occupational well-being included three independent but, at the same time, interrelated components. The first component (27% of the variance explained) contained a set of self-esteems of the employees that reflected their awareness of their social and occupational relevance (I, as a competent and sought-after professional). The second component (19%) contained self-esteems that reflected the sustainable dominance of positive emotional states among the employees. And the third component (14%) contained self-esteems that reflected the degree to which the employees realised their aspirations for professional growth, satisfaction with their professional achievements and relationships in the work team. Two areas of further research on the problem of subjective occupational wellbeing are considered relevant. One area is the further elaboration of the ideas of the resource approach for developing and maintaining employees subjective occupational well-being (Schaufeli, Bakker, Van Rhenen, 2009). The other area is research in the framework of cross-cultural and cross-occupational approaches (Brauchli et al., 2013).

The Effects of Global Tax Disparity on Production Outsourcing

This paper studies the effects of international taxation on multinational firms' production outsourcing strategies, which has attracted recent attention from both practitioners and legislators. We find that under the territorial tax system, the presence of global tax disparity may result in subtle changes of a firm's production outsourcing strategy. In particular, the tax consideration can make the firm more inclined to keep material procurement in house and use buy-sell arrangement to retain profit in low tax jurisdictions. Such an effect can not only cause the firm to choose a more expensive material supplier but also overproduce the products. Therefore, besides the general concern of income shifting, tax considerations can further lead to operational distortions. We show that to reduce tax disparity while preventing tax exemption for shifted foreign profit may lead to a win-win outcome for the firm and the stakeholders. The firm will make more efficient operational decisions to obtain a higher after-tax profit at certain reduced tax rate, while the home country stakeholders can receive more tax income. Interestingly, the foreign contract manufacturer may also benefit from such a change.

Revisiting the concept of “fiscal modules”: implications for restoration and conservation programs in Brazil

Fiscal modules (FMs) were created to facilitate the collection of the rural territorial tax in Brazil. In theory, the area of a FM should be enough for a family to have income, survive, and thrive. The current Native Vegetation Protection Law (Law 12.651/2012) gives equal treatment to all people who own up to four FMs through the Environmental Regularization Program for small properties and family agriculture. Thus, FMs are parameters for flexible land allocation, reducing the area in which the restoration of native vegetation is mandatory. In this study, we sought to describe the history of the creation of FMs to verify the correlations between current agricultural and socioeconomic indicators and FM size. We used a case study in the state of Rio de Janeiro in southeast Brazil to analyze how updating the FM affects the Environmental Regularization Program proposed by the Native Vegetation Protection Law. FMs were created in 1979 and set in 1980, but have never been updated. Current data on land use, rate of deforestation, and productivity in rural areas should lead to changes in the FM size and value. Analyzing the data from municipalities in the state of Rio de Janeiro, we found that the groups formed in the cluster analysis differed from the existing FM groups in the state, which range from 5 to 35 ha. This difference may be a consequence of the failure to update the FM parameters, because updating the FM definition may result in less hectares in each FM. This would result in a larger area to be restored, according to the Environmental Regularization Program, and would thus favor the overall goals of forest restoration.

What are the ramifications and/or impacts of the US switching to a territorial tax system?

AbstractIn this article, we focus on the potential impacts of switching to a territorial tax system in the US. Under the worldwide tax system the US used over the years, income is included in the firm's taxable income, but their foreign income taxes paid can be claimed as deductions or credit to avoid double taxation With a territorial tax system approach, firms would only be paying taxes on the portion of their income being made in their home country. We focus on different studies that analyze the ways in which the US has moved towards a territorial tax system over the years. We also use studies done on the UK and Japan, G‐7 nations that have switched to a complete territorial tax system in recent years, to compare their motives and outcomes to what would potentially happen in the US.

Territorial Tax System Reform and the Financial Behavior of Multinational Firms

We investigate whether the move from the worldwide tax system to the territorial tax system in Japan in 2009 affects the financial behavior of overseas affiliates of Japanese multinational companies. The reform substantially reduces the tax costs of profit repatriation in the form of dividends for Japanese overseas affiliates. We use this reform as a quasi-natural experiment to investigate whether and how the tax system affects multinationals’ cash holding and financing policies. Findings from our study sheds some light on possible outcomes of similar tax reforms in countries such as the United States. Based on a sample of Japanese overseas affiliates located in both Europe and Asia, we do not find a robust link between the tax costs of dividend repatriation and the cash-asset ratio for Japanese overseas affiliates before the territorial tax system reform. Moreover, we do not find that Japanese overseas affiliates reduced their cash-holdings since the territorial tax reform, no matter whether they are located in countries with high tax costs of repatriation or in countries with low tax costs of repatriation. We further conduct Difference-in-Differences analysis to compare Japanese overseas affiliates with similar US overseas affiliates located in the same host countries. The comparison between the Japanese and US overseas affiliates are reasonable as the tax system on foreign profits were similar in the two countries before Japan moved to the territorial tax system. We do not find significant difference in the cash-holding patterns and capital structures between Japanese and similar US overseas affiliates. While the territorial tax system reform did not change multinationals’ financial behavior during our sample period, the reform can enhance the competitiveness of Japanese firms in foreign countries by reducing their tax burden of repatriation.

Special Tax Zones and Proportionality: A New Parameter for the Necessity Test

The judgement of proportionality under the variables of fundamental freedoms and State aid rules is a process that often fails to promote legal certainty with respect to the necessity test, especially when the review involves tax measures of a Special Tax Zone (STZ). The central idea of this article suggests the possibility of a new parameter for the necessity of territorial tax measures in order to limit the discretionality of the EU institutions and contribute in terms of legal certainty. For this purpose, the concept of ‘fiscal residue’ is presented, giving evidence of its possible implementations in the context of STZs as an objective parameter for the necessity test, for both fundamental freedoms and State aid rules. The discussion of the results covers the EU law and national law perspectives as well as the possibility of a system of EU governance for the use of the fiscal residue with respect to STZs. Finally, the new outlook of the necessity test is focused on the equalization of the fiscal residue, opening doors for a more comprehensive idea of European Union, including the value of social cohesion at the territorial level. Special tax zones, EU tax law, Territorial tax incentives, Fundamental freedoms, Regional fiscal aid, Proportionality, Necessity test, Least restrictive alternative, Fiscal residue, Horizontal fiscal balance, Fiscal equalization

Special Tax Zones and State Aid Rules: New Perspectives for EU Cohesion Policy

State aid rules do not usually offer sufficient space for territorial tax measures to address the social issues of the most disadvantaged areas of the EU. The aim of this article is to find out the coordinates of a new model of special tax zones that can overcome these limitations on the basis of the concept of social tax incentives through an investigation on the possibilities left by the Altmark criteria and Article 106(2) Treaty on the Functioning of the European Union (TFEU). The literature and other legal sources on the topic are analysed, including the main experiences of the Member States and the key aspects related to the ‘social services of general interest’. The article concludes with the presentation of the so-called ‘social cohesion zone’ as a new instrument for the EU cohesion policy based on social tax incentives, in accordance with the fundamental values of the treaties and the constitutional traditions of Member States. The final recommendation consequently addresses the adoption of a soft law instrument that can give evidence of the social cohesion zone within the field of EU tax law. Special tax zones, State aid rules, Social cohesion policy, EU tax law, Territorial tax incentives, Regional fiscal aid, Social tax incentives, Social services of general interest, Altmark criteria, Social cohesion zone

Where Does Multinational Investment Go with Territorial Taxation? Evidence from the United Kingdom

In 2009, the United Kingdom changed from a worldwide to a territorial tax system, abolishing dividend taxes on foreign repatriation from many low-tax countries. This paper assesses the causal effect of territorial taxation on real investments, using a unique dataset for multinational affiliates in 27 European countries and employing the difference-in-differences approach. It finds that the territorial reform has increased the investment rate of UK multinationals by 16.7 percentage points in low-tax countries. In the absence of any significant investment reduction elsewhere, the findings represent a likely increase in total outbound investment by UK multinationals. (JEL F23, G31, H25, H32, H87)

Where Does Multinational Profit Go with Territorial Taxation? Evidence from the UK

In 2009, the United Kingdom abolished the taxation of profits earned abroad and introduced a territorial tax system. Under the territorial system, firms have strong incentives to shift profits abroad. Using a difference-in-differences research design, we show that profits of UK subsidiaries in low-tax countries increased after the reform compared to subsidiaries of non-UK multinationals in the same countries, by an average of 2.1 percentage points. The increase in profit shifting also leads to increases in measured productivity of the foreign affiliates of UK multinationals of between 5 and 9 percent.

ОРГАНИЗАЦИЯ РАБОТЫ ТЕРРИТОРИАЛЬНОГО НАЛОГОВОГО ОРГАНА: СОСТОЯНИЕ И ПУТИ ПОВЫШЕНИЯ ЭФФЕКТИВНОСТИ (ПО МАТЕРИАЛАМ РЕСПУБЛИКИ ДАГЕСТАН)

This article is devoted to the consideration of the key problems of the activity of the territorial tax authority, in terms of the organization of tax administration and tax audits. The article reflects the main problematic aspects of the organization of tax control in the region, in particular in the Republic of Dagestan. A detailed analysis is carried out and an assessment of the activities of the territorial tax authority in mobilizing taxes into the budget system is given. The priority directions of improving the work of the territorial tax authority, in particular the Federal Tax Service of Russia for the Republic of Dagestan, on organizing tax audits and in-creasing their efficiency in the context of the development of digital technologies are substantiated.

Territorial Tax Reform and Profit Shifting by US and Japanese Multinationals

In 2009, Japan began to exempt dividends paid by Japanese-owned foreign subsidiaries to their parent firms from home-country taxation. This tax reform switched Japan's corporate tax system to a territorial tax system that exempts foreign income from home-country taxation. In this paper, I examine the impact of the territorial tax reform on the profit-shifting behavior of Japanese multinationals. I analyze the change in the sensitivity of the reported profits of Japanese-owned foreign subsidiaries to host countries' corporate income tax rates after the tax reform, using US-owned foreign subsidiaries as a comparison group. I find that, on average, the profits of US-owned foreign subsidiaries are more sensitive to host countries' tax rates than are those of Japanese-owned foreign subsidiaries over the whole study period from 2004 to 2016 and over the subperiod from 2004 to 2007, when both countries used the worldwide tax system. However, the sensitivity of the pre-tax profits of Japanese-owned foreign subsidiaries, particularly large subsidiaries, to host countries' corporate tax rates significantly increased from 2008 to 2012 in response to the 2008 announcement of the implementation of the territorial tax regime, relative to that of the US-owned foreign subsidiaries. This suggests that the introduction of the territorial tax system encouraged profit shifting by Japanese multinationals.

Special Tax Zones in the European Union: Implementing Models under State Aid Rules

There is a significant interplay between Special Tax Zones and the variables of EU law. This article aims to identify the implementing models regarding Special Tax Zones in light of State aid rules and provides an analysis of various EU law sources, as well as the experience of Member States. Considering the strict limits set by State aid rules, however, Member States face numerous difficulties in introducing territorial tax measures in their disadvantaged regions.

The effect of a worldwide tax system on tax management of foreign subsidiaries

Under a worldwide tax system, firms pay taxes on their domestic income and repatriated foreign income, whereas under a territorial tax system repatriated foreign income is exempt from taxation. We examine whether worldwide tax systems reduce the incentives of multinational corporations to engage in tax management in their foreign subsidiaries. Using two quasi-natural experiments, we show that multinationals lower the effective tax rates in their foreign subsidiaries after countries switch from a worldwide to a territorial tax system. Thus, multinationals subject to a worldwide tax system face competitive disadvantages compared to competitors from countries with a territorial tax system.

The Concept of Special Tax Zones in EU Tax Law Claudio Cipollini

The aim of this article is to define a general concept of STZs in the context of EU tax law to be able to explain the different experiences of territorial tax incentives in the Member States. The research is conducted through the review of the relevant sources such as the literature on the topic, the EU legal framework, and the experience of the Member States. The concept of STZs developed here includes a territorial dimension related to the presence of a geographical border as well as of a reference framework with a territorial connecting factor, a structural dimension focusing on the typologies of the tax benefits, and, finally, a functional dimension that considers the objectives of tax policy carried out by public authorities. In the conclusion, a comprehensive definition of STZs is formulated summarizing the key features as they emerge from the research process. At the end, the results achieved offer a common reading key for a deeper understanding of STZs within EU tax law and for a more conscious use of such an instrument in the context of economic and social policies.

More Anti-SimplificatIon: How PTI and GILTI Override the Section 245A Exemption and the U.S. Territorial Tax System

Prior to the 2017 tax reform (TCJA), previously taxed income (PTI) was a necessary part of Subpart F, and ensured that U.S. shareholders, who paid tax currently on their controlled foreign corporation’s (CFC’s) Subpart F income, were not taxed again on the same earnings when distributed as dividends. Section 959 served this function by excluding distributions of PTI from the U.S. shareholder’s gross income. PTI implemented the policy goals of preventing double taxation of the same earnings and ensuring that credit for PTI occurred at the earliest time possible. When the TCJA enacted a territorial tax exemption system utilizing the section 245A deduction, the actual distribution of earnings from a CFC to its corporate U.S. shareholder was no longer a taxable event. It seemed that PTI would no longer be necessary. Yet PTI in conjunction with the global intangible low-taxed income (GILTI) are a powerful combination, which now dominate the United States international tax system. The PTI ordering rules have the effect of allowing the section 245A deduction only after all previously taxed earnings have been allocated. For multinational corporations with significant amounts of GILTI and other PTI, this effect potentially eliminates the availability of the section 245A deduction and, therefore, the exemption system established by the TCJA. This paper demonstrates how the post-TCJA laws may function to override the U.S. exemption tax system. Thus, instead of a move toward a territorial tax system, the TCJA may be characterized as a move toward a pure residence-based, worldwide tax system without deferral.

Análise do esforço fiscal na arrecadação do IPTU para os municípios do estado do Ceará utilizando modelo de fronteira estocástica

Baseado no entendimento da baixa exploração do Imposto Predial e Territorial Urbano (IPTU), este artigo tem como objetivo calcular o índice de esforço fiscal (IEF) para os municípios do estado do Ceará durante os anos de 2008 e 2016 no tocante à arrecadação do IPTU. A partir de um exercício de estimação das diferentes capacidades de arrecadação, e por meio do aproveitamento das características próprias de cada esfera governamental, pretende-se relacionar suas capacidades efetiva e potencial na obtenção dessas receitas, com a criação de um ranking ordenando e classificando os municípios. A análise se deu por meio de um modelo econométrico de fronteira estocástica, que expressa a quantidade máxima de produto que pode ser obtido a partir de uma dada quantidade de insumos. O estudo comprova que os municípios se mostram, em sua maior parte, ineficientes, e que mecanismos de melhoria na arrecadação do IPTU precisam ser bastante aprimorados.

Taxes and the location of targets

We use firm-level data to investigate the impact of taxes on the international location of targets in M&A, allowing for domestic acquisitions and heterogeneous responses by companies. The statutory tax rate in the target country is found to have a negative impact on the probability of an acquisition in that country. In addition, the estimated size of the effect is found to depend on whether (i) acquirer is a domestic or a multinational enterprise; (ii) the acquisition is domestic or cross-border; and (iii) the acquirer's country has a worldwide or territorial tax system.

WAYS OF RADICAL CHANGE OF THE IMAGE OF TAX AND CUSTOMS OFFICERS


 
 
 Tax and customs system is a multifunctional structure, therefore, in order to ensure unified application of the legislation, professional training of staff should be organized by means of guidelines, workshop discussions, qualification trainings and other instruments, which should be attended by the employees of territorial and regional tax and customs authorities. Along with implementation of legislative reforms and application of advanced technologies for increase of confidence in tax system and expansion of capabilities, the role of a professional tax officer is of high importance.
 
 

DECISION-MAKING IN THE MANAGEMENT OF THE TAX AUTHORITIES ON THE BASIS OF INTEGRATED PERFORMANCE INDICATORS


 
 
 
 The paper highlights the results of applying the methodology of integral convolution of key indicators of economic efficiency of territorial subdivisions of the tax authority of the state: results of tax collection, productivity, cost, dynamics of indicators. The criteria for grouping of territorial tax divisions according to the values of the indicator of effectiveness for the purpose of making tactical and strategic management decisions are formed. The paper formulates recommendations on the use of the proposed approach in goal- setting when making managerial decisions based on the "sigma" management.